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Restructuring Food Corporation

By Charan Singh
Published: 31st January 2015 06:00 AM
Last Updated: 30th January 2015 11:11 PM
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The high-level committee (HLC) on re-structuring of the Food Corporation of India (FCI), set up in August 2014,
has submitted a path-breaking report on January 19. The HLC assumes importance, as the government of India
(GoI) is rationalising expenditure, including subsidies, which includes the cost in implementing National Food
Security Act, 2013 (NFSA). The terms of reference of the HLC, amongst others, included examination of the
administrative, functional and financial structure of the FCI and feasibility of unbundling it to improve
operational efficiency and financial management; suggest measures for overall improvement in management
of foodgrains; and reorient its role in minimum support price (MSP) operations, distribution of foodgrains, and
food security system of India.
The FCI was set up in 1965 to meet major shortfall of grains, especially wheat, where imports accounted for
more than one-third of the total domestic consumption. In view of the shortage of foreign exchange reserves,
special arrangements were made under PL-480 to import wheat. The FCI, then, was mandated to: a) provide
effective price support to farmers to encourage adequate domestic production b) procure and supply grains
through the public distribution system (PDS) to economically vulnerable sections of society and c) maintain
strategic reserves to stabilise markets for basic foodgrains.
The HLCs findings are very interesting. First, only 6 per cent of the farmers have benefitted from selling rice
and wheat directly to the FCI. Second and more importantly, a majority of the farmers werent even aware of
the FCIs existence and its procurement activities. Illustratively, only 25 per cent of paddy farmers and 35 per
cent of wheat farmers were aware of it. Third, leakages in PDS in 2011 were 46.7 per cent, and in some states
as high as 90 per cent, confirming worst fears of economists and analysts. The key factors that could be
causing losses are multiple handling, poor quality wagons, en route pilferages, and inadequate security at rail
points. Fourth, actual average stocks of foodgrains at 73 million metric tonne (MMT) during 2011-12 to 2013-14
were about 40 MMT above the stipulated buffer stock. The cost of these stocks would translate into Rs 1 lakh
crore of carrying buffer, in addition to food inflation of 10 per cent, and nearly 1.9 per cent households
reporting inadequate food availability.
The recommendations made by the HLC after extensive consultations focus on ensuring reorientation of the
PDS to efficiently serve economically vulnerable consumers; stabilising grain markets; and procurement
benefits reaching a large number of farmers. First, amongst key recommendations, the FCI should move out
from states like Punjab, Haryana and Andhra Pradesh which have created infrastructure for procurement to
other states like Assam, Bihar and UP where farmers suffer from distress sales. Second, the GoI should explore
the possibility of switching to cash compensation without physically handling grains. Third, the GoI should
gradually introduce cash transfers under targeted public distribution system, starting with large cities with 1
million-plus population. Fourth, the FCI should outsource its stocking operations to the private sector. Fifth,
the GoI needs to revisit its procurement and MSP policy, which is mainly focussed on rice and wheat, despite
23 items including pulses and oilseeds under MSP. Finally, the FCI should introduce a proactive liquidation
policy to offload stocks in the market whenever in excess of stipulated buffer stocks.

The HLC also examined the policy of low output and input prices followed by GoI and illustratively explained in
detail the malady in pursuing such logic. This policy of ensuring low output prices entails providing inputs at
low rates through substantial subsidies. Illustratively, in 2014-15, fertiliser subsidy is budgeted at Rs 73,000
crore, in addition to existing arrears of Rs 35,000 crore. Further, irrigation is subsidised at state level, in
varying degrees in terms of subsidised power, low canal irrigation charges and no charge on capital
expenditure. These irrigation subsidies could cross Rs 60,000 crore. The key problem with low input costs is
that scarce resources get overused, especially when targeting is poor. A clear illustration is the sharply falling
water table because of free electricity and deteriorating soil quality due to excess use of subsidised fertilizer
in Punjab.
In view of the fact that 11.5 crore new accounts have been opened under the Pradhan Mantri Jan Dhan Yojana,
covering 99.7 per cent of the resident Indians, and connecting them with Aadhaar card is already in the
process, pattern and flow of food subsidy to consumer needs another assessment. According to estimates, 36
crore people in India are below the poverty line who probably need food subsidy. Also, according to the
National Sample Survey Organisation, there are about 1.9 per cent of households in India that had reported
inadequate food availability in 2004-05. Of these, about 1.6 per cent households reported inadequate food for
some months while only 0.3 per cent reported inadequate food for all months. Further, food inadequacy was
more prevalent in rural areas. The states in which high level of food inadequacy was above the national
average were West Bengal, Odisha, Assam, Bihar, Kerala and Chhattisgarh. Thus, it can be noted that
incidence of poverty in a state and inadequacy of food availability need not be correlated. To address this
inadequacy of food, the GoI should consider involvement of urban local bodies and panchayati raj institutions
to identify, and target-feed genuinely hungry, rather 80 crore people under NFSA.
The original objective of the FCI was to stabilise the markets for foodgrains. Over the last five decades, there
has been a paradigm shift in the foodgrains markets, with India now being an exporter and not importer of
foodgrains. But in the last few years, it has been observed that the prices of some food items, especially
onions, have been volatile and have affected the overall price level, compelling the RBI to raise interest
rates. The production of onions, which follows an agricultural cycle of about four months, is concentrated in
Maharashtra, Madhya Pradesh, Karnataka and Andhra Pradesh. In view of the fact that onion has long shelf
life, and can be easily stored/hoarded, the FCI could consider revising its lists of items under the MSP to
stabilise food markets.